Readers' comments

As a fairly academic minded economist as well as a rather reckless entrepreneur I find it amusing that risk aversion in asset portfolios should be used as a proxy to predict entrepreneurial behaviour.

First, the nature of the entrepreneur who, according to Schumpeter's classic definition, pursues opportunity without regard to resources controlled, is quite different to that of a manager who chooses how to make the best of an asset base.

Secondly, it ignores that many entrepreneurs actually start up because external circumstances (being laid off) lower the opportunity cost of dusting off that old business plan and gambling with somebody else's money (at least in developing economies).

Thirdly, the notion of risk inherent in an asset purchased in financial markets is exogenous whereas entrepreneurs tend to think their brilliance, persistence and/or luck will most assuredly tip the scales in their favour.

In reading this article I celebrate (for the n'th time) my decision to study an MBA instead of a PhD.

Prospect Theory covers the nuances around risk, the most potent hypothesis is that people are risk prone when it comes to making gains and potentially risk averse where there is an inkling of making a loss. But we have progressed further than that and now it is evident that there are more than just the simplicity that Kahnemann and Tversky put forth; the fact that we have a poor sense of conditional probability and we mistake P(A/B) as P(A) or P(B) is one of the reasons why prior probabilities and posterior probabilities get muddled up in most of our decisions (Bayes theorem is less applied). The herding phenomenon is the next one, which forces us to believe a wrong when the overwhelming evidence around favors so. These all have a bearing on decisions around risk.

Yet another one of those useless studies where the answer is already known ex-ante by common sense, but the causality identification obsessed economists will do a study anyway. How many people think that they need Ph.D. economists to prove to them that past experiences matter in risk-taking preferences, raise your hand -- none? Thought so!
(This comment is from a Ph.D. economist who also agrees with 651columbia's comment!)

Both risk-takers and the risk-averse serve a purpose. Keep in mind that most risky moves fail - so if everyone made risky moves we would be worse off - not to mention that boring but necessary tasks would not get done.
The status quo is good - those few who choose to take risks take risks, most fail - and we benefit from the accomplishments of those who succeed.

"Given the choice, would you prefer a gift of $50, or to play a game with a 50% chance of winning $120? It might seem logical to pick the second, since the average pay-off—$60—is bigger."

Choosing the first option is perfectly logical. The value of the first dollars are worth more to a person, than the ones after.

From an evolutionary perspective. In older times gambling and losing all resources, could mean death. So the first choice would be Surviving, and the second choice would be gambling between Thriving or dying.

To expand on Cheddar Trifle's good insight and Omricon's excellent example - if the "rich" were offered the chance of receiving $120 they would be less likely to partake in the gamble if they had to pay 50% of the $70 additional reward in Ed Balls' vision for the UK or 75% in Francois Hollande's current fiscal nightmare today that is France?

"Controlling for age, education, gender and marital status, they found that those in occupations, industries and regions hit harder by unemployment were less likely to own stocks a decade later."

This doesn't sound all that insightful. You would expect that an area hit harder by unemployment will be less wealthy 10 years later. If I don't have as much money then I will be less likely to buy stocks. Might have nothing at all to do with "risk-averseness" and more to do with investable assets.

The conclusion that "Research consistently finds, for example, that the educated and the rich are more daring financially." may be incorrect since there is an inherent selection/survivorship bias. Those who have become rich are likely to be the few in number from amongst the 'risk hungry' whose gamble/s actually paid off.

This research will not have examined, for example, the mathematically-challenged masses who take part in lotteries but never make a bean. Instead the research will have concentrated on the extremely rare lottery, and other, winners who actually won the lottery as a result of their "financial daring".

Not a good example for the rest of us, I would argue, where a well balanced and cautious risk-taking approach might be more appropriate?

"Consider this simple test: given the choice, would you prefer a gift of $50, or to play a game with a 50% chance of winning $120?"
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This is because $50 can be put to immediate use for many. The remaining $70 is a luxury. Try this test instead: $5 or a 50/50 gamble on $12. I think you will find most people except the very poorest take the gamble. That is of course exactly how the rich see their investments and may explain some of the discrepancy alongside selection bias.

One reason for an increase in risk-aversion since 2008 may be the increased anti-rich rhetoric and higher taxes on the wealthier. Faced with a high-risk high-return venture, it is less likely to happen if the state takes the majority of the return in the event of success, but bears none of the risk.
This is something frequently missed by the 'squeeze the rich' crowd; that an innovative, entrepreneurial economy needs people who will 'take a punt', with their own money, on a risky idea. If they have a high chance of failure they won't bother unless the return, in the event of success, is large.

The conclusion that "Research consistently finds, for example, that the educated and the rich are more daring financially." may be incorrect since there is an inherent selection/survivorship bias. Those who have become rich are likely to be the few in number from amongst the 'risk hungry' whose gamble/s actually paid off.

This research will not have examined, for example, the mathematically-challenged masses who take part in lotteries but never make a bean. Instead the research will have concentrated on the extremely rare lottery, and other, winners who actually won the lottery as a result of their "financial daring".

Not a good example for the rest of us, I would argue, where a well balanced and cautious risk-taking approach might be more appropriate?

There is another risk driver in decision making that seems to be overlooked in all these studies: the set of alternatives that presents itself to the investor. Should such a set be poor in terms of opportunities, one will resort to risky investments. This seems to be the case presently in financial markets where fixed income simply does not provide for adequate future capital growth and revenues. Thus, one that is not necessarily risk seeking may have no other choice that to choose a course of action that he would otherwise ignore.

This reminds me of a study I heard about a few years ago, where men who were shown pictures of pretty women soon after became more risk-seeking. I wonder if this is why trading firms often have gorgeous women working the front desk?

The article cites Bernoulli early on. Is this the same person who showed that many cases of seeming 'risk aversion' could equally well be explained by the tendency to have concave utility functions? Money is not utility. One's second billion isn't as useful as one's first.
It seems to me that Bernoulli's theory could explain the examples in the article without recourse to any 'risk aversion'. For example, maybe watching a horror film would introduce fears for the future, changing one's utility function much as if one were poorer. In this case so called risk-aversion might be rational.
The article also seems to conflate uncertainty and probability, which makes it difficult to interpret. If risk is just about probability (as in much of finance theory)then 'risk aversion' means something different than if it takes account of uncertainty as a whole. Even ignoring Bernoulli, the examples could be (rational)uncertainty aversion (as in the Ellsberg 'paradox') rather than aversion to (probabilistic) 'risk'.
I blog at djmarsay.wordpress.com, e.g. search for 'Bernoulli'.

Simple answer this question is those people are more insecure constantly fear of bankruptcy they are more cautious about their finances.Indians are best example of most unsecured people in the world.unpredictable Monsoon made their life wretched from ancient time.so they are always carving for gold.live in poverty,their life is miserable.

I think the markets needs cautious risk taking. As the last financial crisis has shown, those with no skin in the game such as mortgage granting businesses bundling up poor quality loans, bundling them up in ill rated securities and selling them off for guaranteed profits for themselves add nothing to business in general. This also applies to CEO's with golden parachutes.

When the markets go sour, everyone feels that they may have no chance at redemption if things goes bad. They look to retain what they still have. Slowly but surely people will get braver again until irrational exuberance again overtakes good sense. This is the cycle of the markets.
Most wait until the bravest make the first moves. We need some leaders to start the new charge. After the scorching of 2008, the large institutions that fell, it may take some time yet for peoples faith to be restored in the markets and investing in general.